Target vs. BusinessWeek: Case Study in Poor Corporate Communications

In the July 17th issue of BusinessWeek, Robert Berner raised concerns about the quality of Target Corporation's (TGT) credit card portfolio in his article Where Target May Miss The Mark. A summary of Berner's concerns:

-- The Center for Financial Research & Analysis' senior financial analyst Allen Puwalski (who worked previously as a risk analyst for the FDIC) noted that Target's delinquency rose from 4% at the end of 2005 to 4.8% in April 2006. This was the largest increase among eight portfolios with “similar characteristics”, with five of the other portfolios having flat or declining delinquency rates for the same period.

-- Puwalski also reports that the 3 month average of accounts greater than 60 days past due (“60dpd”) is 8.4%. Metris, a sub-prime issuer, is the only lender with securitized receivables over $1b that has a higher 60dpd rate -- 16%.

-- Portales Partners' analyst William Ryan said that Target reported a portfolio yield (interest + fees) of 27.2%, which is closer to Metris' 31% than Citibank's (“a mainstream lender”, according to the article) 17.4%.

Target CFO, Doug Scovanner responded to the article in a letter to BusinessWeek that is posted on Target's web site (.pdf). Aside from accusing Berner of ignoring "nearly all the facts we had provided in our good faith effort to address his questions," Scovanner complains that this article "continues a string of work by this reporter that has been blatantly inaccurate and grossly misleading to your readers." Scovanner concludes his letter by stating that "Target Corporation will no longer engage in any correspondence or communication with Robert Berner as it has proven to be a significant waste of our time."

There are legitimate issues and questions raised by Berner's article, yet Scovanner failed to provide any concrete rebuttal points to any of the concerns raised. Instead, he writes:

...our credit card strategy is carefully conceived and well-executed...it (i.e., the credit card portfolio) has produced consistent, industry-leading financial results over many years... In short, the risks he (i.e., Berner) loves to highlight are starkly inconsistent with the outstanding financial performance we have delivered over time.

Scovanner's refusal to provide supporting evidence to counter Berner's concerns is short-changing the investor community. There are legitimate issues that should be raised against Berner's conclusions:

1) Target's credit card portfolio consists of both the Target Visa and the Target Card (the store card formerly known as the Guest Card). It is not clear if individual points in the article are referring to the Visa card portfolio, the Target card portfolio, or both. Since store cards tend to have lower credit limits and higher APRs (the Target Card APR is 23.99), it is reasonable to deduce that this portion of the portfolio will have a higher yield.

2) According to the article, Target started issuing their Visa card in 2001. Comparing its portfolio growth (as well as issues directly related to portfolio growth) to Citibank, Capital One or GE Capital does not make sense, since their portfolios have been around much longer and are therefore on a completely different growth trajectory.

3) There is an anecdote in the article about a card holder with a $17,000 annual salary who had her credit limit raised to $12,000. Since these portfolios consist of millions of accounts, individual anecdotes do not add much value.

4) The article stated that Target's 60dpd rate is 8.4%, trailing only Metris, which had a 60dpd rate of 16%. While Target may be second, its rate is almost half of Metris'. The question begs to be asked: What was the third highest rate, and how close was Target to that rate? The given comparison is only meaningful in a broader context.

In conclusion, rather than presenting itself as the 800 pound playground bully, Target owes the investor community greater transparency on this issue.

Since the article was written, Target's stock hit a new 52 week low of $44.70 (July 18). While it appears that Berner has raised some legitimate concerns on Target's portfolio, I have shown that there are also legitimate concerns regarding some of the logic he employed.

By offering specific rebuttal points to this article, Target would enable investors to make informed decisions on this matter.

TGT 1-yr chart: